Case Analysis

3/7/18

1

Cross-national cooperation and agreements

Toyota in Europe •  In 1990, Toyota had 20 production facilities in 14 countries •  In 2012, it had 50 manufacturing facilities in 27 countries

– Including factories in Czech Republic, France, Poland, Portugal, the UK, and Russia

•  Before 2002, Toyota suffered from low market share and growth in Europe, not posting a profit for its European operations for 30 years

Toyota in Europe: Why the slow growth? •  After WWII, the Japanese government asked European car

makers to significantly decrease exports to Japan – Rebuild the Japanese car industry

•  Europeans reciprocated by limiting Japanese access to European markets – Quota system

• E.g., France at 3% of its market • E.g., Italy at 3,000 units

•  In 1999, the EU lifted the import quota Toyota in Europe: Upswing •  The lifting of the quota allowed Toyota to:

– Invest more heavily in design and manufacturing facilities in the EU

– Broaden the range of products marketed there – Customize their options to better appeal to European

customers • European Design and Development Center established in southern France

• Manufactures all best-selling European vehicles in Europe – Low costs (wages) in Eastern Europe – State-of-the-art production facilities in the Czech Republic and Poland

• Elimination of internal tariffs in the EU allows Toyota to manufacture its cars anywhere in the EU and ship to other member nations duty-free

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

3/7/18

2

manufacture its cars anywhere in the EU and ship to other member nations duty-free

Toyota in Europe: Meeting European Tastes •  Faced with high unemployment and low growth, Europeans

turned to more economical and higher-quality cars •  Erosion of brand loyalty to European car makers •  Emphasis on environmental sustainability increases appeal of

hybrid models – Maintaining a comparative advantage over rivals in hybrid

technology •  Shifting decision-making power from Japan to Brussels

(European division) to better meet European demand

Learning objectives •  Discuss the three major approaches to economic integration •  Discuss the pros and cons of global (the WTO), bilateral, and

regional integration •  Identify how the different approaches to economic integration

can be a free trade agreement, a customs union, or a common market

•  Describe the static and dynamic impact of trade agreements on trade and investment flows

•  Examine how the EU works and its implications for business Introduction •  Economic integration

– the political and monetary agreements among nations and world regions in which preference is given to member countries

•  Bilateral integration •  Regional integration •  Global integration

Introduction •  Trade agreements

– Define the size of the regional market and the rules under which a company must operate

– MNEs are interested in regional trade groups because they also tend to be regional

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

3/7/18

3

– MNEs are interested in regional trade groups because they also tend to be regional • Triad regions = Europe, North America, Asia • Of the 500 largest companies (in terms of FDI and trade), 320 generate at least 50% of their revenues from their home region; only 9 are global (generating at least 20% in each of the three regions)

• A 1% increase in distance results in a 1% decrease in trade

– MNEs also care about trade agreements to determine where to import or source from

Rise of bilateral agreements •  Bilateral agreements

– can be between two individual countries or can involve one country dealing with a group of other countries

•  Also known as – Preferential trade agreements (PTAs) – Free trade agreements (FTAs)

•  Though not easy to negotiate, can be simpler than multilateral agreements – E.g., U.S. signed FTAs with Colombia and South Korea in

2012

Regional economic integration •  Regional trade agreements

– integration confined to a region and involving more than two countries

•  Examples include – European Union (EU) – European Free Trade Area (EFTA) – North American Free Trade Area (NAFTA) – Association of Southeast Asian Nations (ASEAN) – Common Market of Eastern and Southern Africa (COMESA)

Regional economic integration •  Geography matters

– Shorter distances mean lower transportation costs

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

3/7/18

4

•  Geography matters – Shorter distances mean lower transportation costs – Geographic proximity, according to country similarity theory,

suggests consumers’ tastes are more similar and companies can more easily export products produced for the home market to neighboring countries

– Neighbors tend to share a common history and may be more willing to negotiate policies

•  However, FTAs exist between non-neighbors, too

Regional economic integration •  Major types of economic integration

– Free trade area • no internal tariffs • individual external tariffs

– Customs union • no internal tariffs • common external tariffs

– E.g., Toyota had to reach an agreement with the EU as a whole, not individual countries

– Common market • customs union plus factor mobility

– E.g., EU workers can work in any EU country

Effects of integration •  Effects of regional integration

– Allows for specialization and trade based on comparative advantage

– Static effects: shifting of resources from inefficient to efficient companies • trade creation: production shifts to more efficient producers • trade diversion: trade shifts to countries in the group at the expense of countries not in the group

Effects of integration – Dynamic effects: overall growth in the market – Growth allows companies to increase production

• Economies of scale: the average cost per unit falls as the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

3/7/18

5

– Growth allows companies to increase production • Economies of scale: the average cost per unit falls as the number of units produced increases

• Increased competition: pushes companies to become more efficient – E.g., mergers and acquisitions in the EU to match large market

Major regional trading groups •  Companies are interested in regional trading groups because:

– New markets – Sources of raw materials – Production locations

•  The larger and richer the new market, the more likely it will attract attention from MNEs

•  Reduced tariffs and other restrictions provide better access to these regions

The European Union •  European Union (EU)

– The largest and most successful regional trade group in the world

– Some key features • provides free movement of goods, services, capital, and people

• has a common agricultural policy • uses common external tariffs • has a common currency

The European Union •  Key governing bodies

– European Commission • provides political leadership, drafts laws, and runs the various daily programs of the EU

– Council of the EU • composed of the heads of state of each member country; ministers meet regularly to discuss policy

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

3/7/18

6

ministers meet regularly to discuss policy – European Parliament

• has legislative power, control over the budget, and is supervisor of executive decisions; grouped by political affiliation rather than nationality

– European Court of Justice • interprets and applies EU treaties; serves as appeals court for individuals, firms, and organizations fined by the commission for infringing treaty law

The European Union •  Single European Act

– designed to eliminate the remaining nontariff barriers to trade (e.g., certification procedures) in Europe

– However, some barriers still remain (e.g., labeling) •  Lisbon Treaty

– strengthens the EU’s governance process and improves the ability of the EU to make and implement decisions

– Some opposed because of threats to national sovereignty •  Treaty of Maastricht

– fostered political and monetary union • the euro • another way barriers to trade are reduced

Doing business with the EU •  Lucrative market

– Size, income •  Influences corporate strategy, especially for outside MNEs

– Determining where to produce • Centrality = lower transportation costs, but higher labor costs

• E.g., Toyota producing in Eastern Europe – Determining whether to grow through new investments,

expanding existing investments, or through joint ventures/ mergers • Many U.S. companies are buying European companies to

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

3/7/18

7

• Many U.S. companies are buying European companies to gain market presence, eliminate competition, and take advantage of existing distribution channels

– Balancing “common” denominators with national differences • Different cultures and histories • Different rates of growth in different member nations

•  Adopt a pan-European or different regional strategies?

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19